The 30-Second Check That Kills Franchise Deals

What The Directory Actually Is Now

The SBA eliminated its Franchise Directory in May of 2023 and handed franchise eligibility decisions to lenders. That lasted two years.

On June 1 of last year the Directory came back under the current lending rulebook, and it came back with teeth. If a brand meets the Federal Trade Commission's definition of a franchise, it has to be listed on the Directory for its franchisees to obtain SBA financing at all. No listing, no loan. The agency maintains it on its lender resources site, and the requirement carries forward into the version of the rulebook that takes effect October 1.

The mechanic also changed. The old approach was a per-deal addendum, signed by the franchisor and the franchisee on every single transaction. That got replaced by a one-time Franchisor Certification, signed once by the brand, confirming it understands the eligibility standards and which provisions in its agreements are and are not enforceable against a franchisee holding an SBA loan.

One signature instead of a signature per deal. Cleaner for everyone. And it created a cliff.

The Deadline Was June 30. There Was No Announcement.

Brands already on the Directory as of May 2023 had to execute the new certification to stay on it. The research firm that tracks this space estimated roughly 8,000 franchisors needed to file.

The deadline moved twice. First it was July 31 of last year. Then December 31. Then June 30 of this year, and that one held.

If a brand did not execute the certification by June 30, it came off the Directory. Its franchisees are not eligible for SBA financing until the brand goes back through a full eligibility review, which means submitting its disclosure document, its franchise agreement, and every ancillary document it requires franchisees to sign.

That review runs on the franchisor's timeline and the agency's timeline. Not yours.

Here is the part that matters for how you search. Nobody published a list. There was no press release naming the brands that dropped. Two extensions got covered in the trade press because franchisors wanted the extra time. The outcome got almost no coverage at all, because the brands that missed had no reason to announce it.

A deadline that everybody wrote about and nobody reported the result of is exactly the kind of thing that shows up in your underwriting instead of your search.

The Risk Nobody Underwrites

Roughly one in five SBA loans goes to a franchise, averaging around $400,000 apiece. This is not a corner of the market. It is a fifth of it.

And it carries a category of risk most buyers never model. Call it third-party eligibility risk.

Think about what you actually control in an acquisition. You control the price you offer. You control the structure. You control how hard you diligence the financials, how carefully you read the lease, how many customers you call. Every one of those is yours.

Whether a franchisor filed paperwork with a federal agency is not yours. It is not the seller's either. The seller may not know. The seller very likely does not know, because the certification is a corporate matter that never touches an individual location.

It does not end at the deadline. The agency can remove a brand from the Directory later, subject to thirty days of notice, if the brand stops complying with the terms of its certification, or submitted false information, or withheld material information. Certified today does not mean certified in eighteen months.

I have watched a buyer spend four months and real money on diligence for a deal that died on a financing question nobody thought to ask in week one. It is a specific kind of painful, because everything they learned about the business was correct. They were just building it on top of an assumption.

Brokers are still writing SBA pre-qualified on franchise resale listings, and some of them are writing it from a template that was accurate last year.

The Check, And When To Run It

This is a thirty-second problem to solve and a four-month problem to discover late. So solve it first.

Before you sign a letter of intent on any franchise resale, look the brand up on the SBA Franchise Directory. You want two things. Is the brand listed at all, and does the listing show the certification as executed. If the certification indicator is blank, the deal may still be workable through the addendum path, and that is a question for the lender rather than an assumption for you.

Then get it in writing. Ask your lender to confirm the brand's current Directory and certification status in an email before you spend a dollar on diligence. Lenders check this anyway. The only thing you are changing is when.

And put the same question to the seller, worded plainly. Ask whether the franchisor has confirmed its SBA certification status, and ask when they last heard from corporate about it. If the answer is a blank look, that is not a red flag on the seller. It is a red flag on how much of this deal is running on assumption.

After 35 years of looking at these, the deals that die late almost never die on the numbers. The numbers get checked in week one because checking numbers feels like work. The eligibility questions get skipped because they feel like paperwork. Run the ones you are considering through the Bulletproof calculator at DealScore Pro, and then go do the boring thirty seconds that decides whether the math ever gets to matter.

The cheapest diligence in an acquisition is always the question you ask before you fall in love.

What This Means For You

Before you sign an LOI on any franchise resale, look the brand up on the SBA Franchise Directory and get your lender to confirm its certification status in writing. If the brand is not listed, the 7(a) path is closed until the franchisor fixes it, and that repair runs on their schedule rather than yours.

Eligibility questions like this one are the first filter, not the last. If you want the full framework I use to run a deal before a lender ever sees it, watch the free 28-minute masterclass.

Mike

Forward this email. Tell them to grab Mike's free book - Real Estate Is for Suckers: Buy a Business Instead. Same framework Mike uses to stress-test every deal.